I was in Sao Paolo. I had just poured myself another glass of Zeb's home-made pinga, a potent cane liquor. I was toasting three extraordinary achievements by Brazil that coincided that day.

The first was the approval of a $42 billion line of credit for the country from the International Monetary Fund and World Bank. The second, related to the first, was a 4 per cent jump in the value of shares on the nation's bourse. The third was an announcement by the Inter-American Development Bank (IADB) that Brazil had finally surpassed Chile as the hemisphere's most unequal economy.

The IADB calculates that 10 per cent of Brazil's wealthiest families now take 47 per cent of the country's income. The poorest 10 per cent earn less than 1 per cent of that.

Life expectancy in Brazil is now the lowest in the Americas. Fewer than one in five of the nation's poorest children complete primary school, fewer even than in Bolivia and Peru.

What strikes visitors to Sao Paulo is not its poverty, but its arrayed wealth: row after row of luxury high-rise apartment buildings, shopping malls and office skyscrapers - the fruits of a gross domestic product nearly as large as Britain's.

If I drop my glass out the window of this luxury hotel, I'll kill a chicken in the favela below. Favelas are shanty towns, with shelters of cardboard, cinder block and corrugated tin that house the sem-terra (the landless), and many refugees from hunger and dispossession from Brazil's North East. These shack villages now flood the spaces between the extravagant urban towers.

The pinga helps me to make sense of this mad mix of poverty and riches. So does a post card from Rio de Janeiro that is completely black. Residents of Rio, South America's City of Light, have sent hundreds of these blacked-out cards to their local politicians. It is a protest against Light, Rio's electricity company, now nicknamed Dark.

Last year, the federal government privatised Rio Light, selling it to Electricite de France and Houston Industries of Texas. The new ownership, which had promised improved service, swiftly axed 40 per cent of the company's workforce.

Unfortunately, Rio's electricity system is not fully mapped. Electricity workers had kept track of the location of wires and transformers in their heads. When they were booted out, they took their mental maps with them.

Nearly every day, a new neighbourhood went dark. The foreign owners blamed the weather in the Pacific Ocean. Rio is on the Atlantic.

But for the Franco-Texan owners, not all was darkness. A windfall from wage cuts and price increases helped the foreign owners hike dividends by 1,000 per cent. Rio Light's share price jumped from 194 reals (97p) to 259 reals.

Last month, the Brazilian government put the Sao Paulo electricity company on the auction block. Despite howls and lawsuits by consumer organisations, the utility was won by the sole bidder, which paid the minimum asking price: the Houston-French consortium. Immediately, the new owners announced the redundancy of 1,000 workers.
Now, say citizen's groups, lights are going out in Sao Paulo, too. The purpose of this tale of privatisation is to illuminate the nasty little details, rarely reported, of what the World Bank's Stiglitz calls 'creating a market-friendly environment'. (Incidentally, it illustrates how Electricite de France operates its colonial enterprises, shortly to include London Electricity.)

The terms of this Brazilian asset sell-off are dictated by a hefty document drafted by Coopers & Lybrand. While the term 'market' is sprinkled throughout, the blueprint is feudal, not capitalist. C & L divides the nation's saleable infrastructure into legally enforceable monopolies designed to guarantee new, principally foreign, owners super profits, unimpeded by real government control or by competition.

It is patterned on the medieval system of 'tax farming' - by which, for a one-off payment, kings permitted private tax collectors to pick the peasants clean.

Stiglitz claims this 'deepest reform' - the sell-off of every public asset the Brazilians can find - was launched by Brazil's government, 'without outside pressure'. Oh, sure.
The quick sale of Brazilian assets - $40bn worth this year - is a non-negotiable condition of the lines of credit from international banks and agencies.

Supposedly, selling utilities, shipping ports and roadways reduces the nation's debts. It doesn't. Privatising infrastructure reduces government debt, but not public debt. Unless the citizenry swears off electricity and water, the public is still responsible for the debts of these services. In effect, the government is covering the cost of its borrowing through an appallingly regressive tax in the form of higher water and electricity prices collected from the nation's workers (and the workless in the favelas).

Of course, Brazil's own elite gets a piece of the plunder. The government requires that any foreign consortium buying state property must include a Portuguese-speaking partner. You will probably not be shocked to learn that friends of the ruling party are receiving special assistance.

Last week, the Minister of Communications and the head of the privatisation programme resigned after transcripts of their intercepted mobile phone conversations revealed their attempts to influence bids for the state phone companies to favour cronies allied with European operators.

The 'reform' process imposed by outside lenders is not limited to the seizure of state assets.

Britain's Brazilian Council sponsored a meeting in London last month on Brazil's public services. A plan to 'improve labour market efficiency' funded by the World Bank, was presented. I've obtained a copy of the document, which proposes five improvements for this nation with the hemisphere's lowest commitment to education and other government services: • Reduce salary and benefits • Cut pensions • Increase working hours • Reduce job stability and employment.

But won't the pay-off, the $42bn credit line, ultimately trickle down to the people in the shacks?

No, says Ildo Sauer, a professor of economics at Sao Paulo University. 'The whole thing will go to pay off gambling losses' - the government's frantic effort to hold up the real's exchange rate against an onslaught by short-selling arbitrageurs.

Brazil is paying out an eye-popping 40 per cent interest on its internal debts to convince its elite to hold their money in Sao Paulo instead of Miami. The $42bn won't cover a year's interest.

Last weekend, I stayed in a stunning home on the beach near Santos (for research purposes, legitimately charged to The Observer). The owner says the joint is worth about £300,000. It is his third home. He pays property taxes of only £1,000 on it.
The local municipality's poor don't send their children to school because tax revenues are insufficient to pay for books, uniforms or students' transport. Brazil lacks neither capital nor wealth. The IMF's $42bn merely permits the affluent to horde their capital or send it abroad.

Brazil's problem is inequality, and the solution to inequality is equality, that is, redistribution of wealth.

Gregory Palast's column "Inside Corporate America" appears fortnightly in the
Observer's Business section. Nominated Business Writer of the Year (UK Press
Association - 2000), Investigative Story of the Year (Industrial. Society - 1999), Financial Times David Thomas Prize (1998).